Construction industry outlook stable in H2, says Fitch

Construction industry outlook stable in H2, says Fitch Mumbai: Despite inordinate delays in project approvals, liquidity crunch and land acquisition issues posing challenges for the construction industry, ratings agency Fitch has said that the outlook for the sector remained stable for the second half.

"The outlook for the domestic construction sector remains stable for H2 of 2012, despite the continued unfavourable macroeconomic environment as some of the risks have already been factored into the ratings," Fitch Rating said in a statement.

The rating agency has, however, opined the medium-term outlook could be affected by ongoing challenges in execution, coupled with high interest rates and lacklustre equity markets.

Fitch has raised concerns over the sector's growing order book position amid slowdown in project execution, which has impacted cash flows and also led to higher working capital requirements.

"Companies are facing delays in raising debt for build-operate-transfer/build-own-operate-transfer projects, with banks exercising greater due diligence on the project execution capability of construction companies. The ability to raise equity has also weakened with the subdued equity markets," it said.

According to the Fitch report, "execution delays are generally a result of issues concerning land, fuel-supply shortages and environmental clearance. While the government has announced a "project clearance board" and a monitoring mechanism to speed up project execution, the effectiveness of this system remains to be seen," it said.

Fitch has said its outlook for the sector may turn positive upon successful execution of the government's infrastructure plans and better availability of funding (both debt and equity) leading to faster turnover of order books.

Conversely, a continued pile-up of orders without matching execution capability and an inability to fund investments in BOT/BOOT projects or working capital requirements could lead to a revision of the outlook to negative, it said.